FCCA FCCA Audit and Assurance 2 — Questions and Answers
Question 1: Which of the following best describes 'materiality' in the context of an audit?
- Any error, regardless of size, that must be corrected
- Information is material if its omission or misstatement could influence the economic decisions of users (Correct answer)
- Only errors exceeding 10% of revenue are material
- Material items are those physically large in size or volume
Correct answer: Information is material if its omission or misstatement could influence the economic decisions of users
Materiality is determined by whether an omission or misstatement could influence the economic decisions of users relying on the financial statements.
Question 2: An auditor discovers a significant fraud risk. Under ISA 240, what must the auditor do?
- Immediately withdraw from the engagement without explanation
- Communicate the matter to management and those charged with governance (Correct answer)
- Issue an adverse opinion automatically
- Report directly to shareholders at the next AGM
Correct answer: Communicate the matter to management and those charged with governance
ISA 240 requires auditors to communicate identified or suspected fraud to management and those charged with governance at an appropriate level.
Question 3: Which audit procedure involves the auditor physically inspecting inventory or other assets?
- Confirmation
- Observation (Correct answer)
- Recalculation
- Analytical procedures
Correct answer: Observation
Observation involves the auditor watching a process being performed (such as a stocktake), while physical inspection of assets is a form of inspection — both are substantive audit procedures.
Question 4: Under the Sarbanes-Oxley Act (SOX) in the US, which section requires management to assess and report on internal controls over financial reporting?
- Section 201
- Section 302
- Section 404 (Correct answer)
- Section 802
Correct answer: Section 404
SOX Section 404 requires management of publicly listed US companies to assess and report on the effectiveness of internal controls over financial reporting, with the auditor attesting to that assessment.
Question 5: What does 'professional skepticism' mean in the context of auditing?
- The auditor assumes the client is dishonest and fraudulent
- The auditor maintains a questioning mind and critically assesses audit evidence (Correct answer)
- The auditor accepts all management representations without question
- The auditor doubts the competence of other audit team members
Correct answer: The auditor maintains a questioning mind and critically assesses audit evidence
Professional skepticism requires the auditor to maintain a questioning mind, be alert to conditions that may indicate misstatement, and critically evaluate audit evidence.
Question 6: Which form of assurance engagement provides a lower level of assurance than an audit?
- Statutory audit
- Review engagement (Correct answer)
- Due diligence investigation
- Forensic audit
Correct answer: Review engagement
A review engagement (governed by ISRE 2400) provides limited assurance — typically expressed as 'nothing has come to our attention' — which is a lower level than the reasonable assurance of an audit.
FCCA FCCA Audit and Assurance 2
Which of the following best describes 'materiality' in the context of an audit?